The Protective Put Strategy is a risk management technique that allows traders and investors to limit downside losses on a long position by purchasing a put option. Often described as insurance for your portfolio, this strategy provides a guaranteed floor price while still allowing for upside potential. It’s widely used in both equities and forex to hedge against adverse price moves, especially during periods of elevated uncertainty.

In the forex market, protective puts are ideal for traders who want to stay long a currency pair but are concerned about short-term volatility, macro events, or geopolitical risks.

What Is a Protective Put?

A protective put consists of:

• Holding a long position in an underlying asset (e.g. EUR/USD, GBP/JPY)
• Buying a put option at a selected strike price to hedge against downside risk

This creates a position where:

• Upside profit potential remains unlimited
• Downside is limited to the difference between the entry price and the put strike, plus the option premium

How the Strategy Works

1. Maintain or Enter a Long Spot Position
   Continue to hold the currency pair you expect to rise.
2. Buy a Put Option
   Choose a strike price below the current spot to define your risk threshold.
3. Track Market Movement
   If the asset rises, the put expires worthless and the spot position profits.
   If the asset falls, the put increases in value and offsets losses.
4. Close or Roll
   Reassess and roll the put as the option approaches expiry or if market conditions change.

Example: Protective Put on GBP/USD

• Long GBP/USD at 1.2650
• Concerned about volatility ahead of BoE announcement
• Buy 2-week 1.2500 GBP/USD put
• If GBP/USD drops to 1.2400:
  • Spot loss = -150 pips
  • Put is 100 pips in-the-money (strike – spot)
  • Net loss is limited to 150 – 100 = 50 pips + premium paid

Benefits of the Protective Put Strategy

• Downside Protection: Guarantees a minimum exit price for your long position
• Unlimited Upside: Unlike stop-losses, you retain full profit potential if price rallies
• Peace of Mind During Events: Ideal before NFP, FOMC, CPI, or elections
• Flexible Risk Management: Choose strike and expiry based on risk tolerance

Ideal Use Cases

• Macro Events Ahead: Central bank meetings, inflation releases, geopolitical risks
• Portfolio Hedge: Use in basket trading or carry trades where volatility risk exists
• Post-Profit Lock-In: Protect unrealised gains in a long position
• Long-Term Trend With Short-Term Risk: Remain exposed while protecting against corrections

Risks and Limitations

• Premium Cost: You must pay for the put, which reduces net returns
• Wasted Hedge If Market Rallies: The put expires worthless if the market stays bullish
• Time Decay (Theta): Short-dated options lose value quickly if price doesn’t fall
• Implied Volatility Impact: Expensive in high-IV environments

Risk Management Tips

• Use Out-of-the-Money Puts: Cheaper while still offering meaningful protection
• Time Your Entry: Buy protection ahead of high-risk events, not after
• Roll or Adjust: If outlook changes, roll to different strikes or expiries
• Balance Cost and Protection: Compare risk-reward with stop-loss or options spreads

Use Case: EUR/USD Post-ECB Strategy

• Long EUR/USD at 1.0950 with target at 1.1200
• ECB meeting may cause volatility
• Buy 1-month 1.0850 put
• If EUR/USD falls to 1.0800:
  • Loss on spot = 150 pips
  • Put limits loss to 100 pips (excluding premium), protecting capital

Conclusion

The Protective Put Strategy is a smart, disciplined approach to managing risk in long currency positions. It offers downside protection while preserving upside participation — making it especially valuable for macro traders, swing traders, and investors navigating uncertain markets.

To learn how to incorporate protective options strategies into your trading plan and protect positions like a professional, enrol in our risk-focused Trading Courses tailored for macro, options, and portfolio managers.